UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2010
or
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-16465
Retractable Technologies, Inc.
(Exact name of registrant as specified in its charter)
Texas
|
|
75-2599762
|
(State or other jurisdiction of
incorporation or organization)
|
|
(I.R.S. Employer
Identification No.)
|
511 Lobo Lane
|
|
|
Little Elm, Texas
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|
75068-0009
|
(Address of principal executive offices)
|
|
(Zip Code)
|
(972) 294-1010
(Registrants telephone number, including area code)
(Former name, former address, and former fiscal year, if changed since
last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting company
x
|
(Do not check if a smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
o
No
x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13, or 15(d) of the
Securities
Exchange
Act
of
1934
subsequent
to
the
distribution
of
securities
under
a
plan
confirmed
by
a
court.
Yes
o
No
o
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuers classes of common
stock, as of the latest practicable date: 23,960,864 shares of Common Stock, no
par value, issued and outstanding on November 1, 2010.
RETRACTABLE TECHNOLOGIES, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2010
TABLE OF CONTENTS
PART IFINANCIAL INFORMATION
Item 1. Financial Statements.
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
|
|
September 30, 2010
|
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|
|
|
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|
(unaudited)
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|
December 31, 2009
|
|
|
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ASSETS
|
|
|
|
|
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Current assets:
|
|
|
|
|
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|
Cash and cash equivalents
|
$
|
19,721,370
|
|
$
|
18,126,084
|
|
Accounts receivable, net
|
|
6,855,090
|
|
|
9,948,210
|
|
Inventories, net
|
|
10,055,569
|
|
|
6,907,369
|
|
Income taxes receivable
|
|
16,024
|
|
|
3,655,637
|
|
Other current assets
|
|
326,320
|
|
|
624,393
|
|
Total current assets
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|
36,974,373
|
|
|
39,261,693
|
|
|
|
|
|
|
|
|
Property, plant, and equipment, net
|
|
13,034,099
|
|
|
14,234,181
|
|
Intangible assets and other assets, net
|
|
412,845
|
|
|
445,425
|
|
Total assets
|
$
|
50,421,317
|
|
$
|
53,941,299
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|
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|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
$
|
2,225,824
|
|
$
|
6,997,310
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|
Current portion of long-term debt
|
|
508,835
|
|
|
2,628,652
|
|
Accrued compensation
|
|
437,877
|
|
|
561,484
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|
Marketing fees payable
|
|
|
|
|
1,419,760
|
|
Accrued royalties to shareholders
|
|
953,421
|
|
|
843,327
|
|
Other accrued liabilities
|
|
2,205,367
|
|
|
745,460
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|
Total current liabilities
|
|
6,331,324
|
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|
13,195,993
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|
|
|
|
|
|
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Long-term debt, net of current maturities
|
|
4,439,738
|
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|
4,824,833
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|
Total liabilities
|
|
10,771,062
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|
18,020,826
|
|
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|
|
|
|
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Stockholders equity:
|
|
|
|
|
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|
Preferred stock $1 par value:
|
|
|
|
|
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Series I, Class B
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144,000
|
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|
144,000
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|
Series II, Class B
|
|
219,700
|
|
|
219,700
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|
Series III, Class B
|
|
130,245
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|
|
130,245
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|
Series IV, Class B
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|
552,500
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|
|
552,500
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|
Series V, Class B
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|
1,238,821
|
|
|
1,238,821
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|
Common stock, no par value
|
|
|
|
|
|
|
Additional paid-in capital
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|
57,624,504
|
|
|
57,089,153
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|
Retained deficit
|
|
(20,259,515
|
)
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|
(23,453,946
|
)
|
Total stockholders equity
|
|
39,650,255
|
|
|
35,920,473
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|
Total liabilities and stockholders equity
|
$
|
50,421,317
|
|
$
|
53,941,299
|
|
See accompanying notes to condensed financial
statements
1
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF
OPERATIONS
(unaudited)
|
|
Three Months
Ended
September 30, 2010
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|
|
Three Months
Ended
September 30, 2009
|
|
|
Nine Months
Ended
September 30, 2010
|
|
|
Nine Months
Ended
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Sales, net
|
$
|
12,235,018
|
|
$
|
10,752,445
|
|
$
|
28,149,368
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|
$
|
21,763,523
|
|
Cost of sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of manufactured product
|
|
6,081,201
|
|
|
7,034,384
|
|
|
14,565,160
|
|
|
13,613,625
|
|
Royalty expense to shareholders
|
|
953,454
|
|
|
782,335
|
|
|
2,107,967
|
|
|
1,645,230
|
|
Total cost of sales
|
|
7,034,655
|
|
|
7,816,719
|
|
|
16,673,127
|
|
|
15,258,855
|
|
Gross profit
|
|
5,200,363
|
|
|
2,935,726
|
|
|
11,476,241
|
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6,504,668
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|
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Operating expenses:
|
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|
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Sales and marketing
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|
1,140,151
|
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|
1,024,191
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|
|
2,946,128
|
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|
3,559,790
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|
Research and development
|
|
316,044
|
|
|
195,753
|
|
|
865,295
|
|
|
826,479
|
|
General and administrative
|
|
2,729,116
|
|
|
5,264,302
|
|
|
11,862,507
|
|
|
12,489,453
|
|
Total operating expenses
|
|
4,185,311
|
|
|
6,484,246
|
|
|
15,673,930
|
|
|
16,875,722
|
|
Income (loss) from operations
|
|
1,015,052
|
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|
(3,548,520
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)
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|
(4,197,689
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)
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|
(10,371,054
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)
|
|
|
|
|
|
|
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|
|
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|
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|
Interest and other income
|
|
10,046
|
|
|
14,176
|
|
|
18,243
|
|
|
54,359
|
|
Interest expense, net
|
|
(69,853
|
)
|
|
|
|
|
(236,390
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)
|
|
|
|
Litigation settlements, net
|
|
7,275,760
|
|
|
|
|
|
7,275,760
|
|
|
|
|
Net income (loss) before income taxes
|
|
8,231,005
|
|
|
(3,534,344
|
)
|
|
2,859,924
|
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|
(10,316,695
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)
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Benefit for income taxes
|
|
|
|
|
(100,027
|
)
|
|
(334,507
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)
|
|
(205,373
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)
|
Net income (loss)
|
|
8,231,005
|
|
|
(3,434,317
|
)
|
|
3,194,431
|
|
|
(10,111,322
|
)
|
Preferred stock dividend requirements
|
|
(342,717
|
)
|
|
(342,717
|
)
|
|
(1,028,151
|
)
|
|
(1,028,151
|
)
|
Income (loss) applicable
to common stockholders
|
$
|
7,888,288
|
|
$
|
(3,777,034
|
)
|
$
|
2,166,280
|
|
$
|
(11,139,473
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
$
|
0.33
|
|
$
|
(0.16
|
)
|
$
|
0.09
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
$
|
0.29
|
|
$
|
(0.16
|
)
|
$
|
0.08
|
|
$
|
(0.47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
23,887,028
|
|
|
23,803,397
|
|
|
23,845,775
|
|
|
23,801,175
|
|
Diluted
|
|
28,767,768
|
|
|
23,803,397
|
|
|
26,499,790
|
|
|
23,801,175
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|
See accompanying notes to condensed financial statements
2
RETRACTABLE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH
FLOWS
(unaudited)
|
|
|
Nine Months
Ended
September 30, 2010
|
|
|
Nine Months
Ended
September 30, 2009
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,194,431
|
|
$
|
(10,111,322
|
)
|
Adjustments to reconcile net income (loss) to net
cash provided by (used by) operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,169,293
|
|
|
1,079,954
|
|
Stock option compensation
|
|
|
1,340,300
|
|
|
1,329,566
|
|
Reserve for non-contractual deductions
|
|
|
850,000
|
|
|
|
|
Provisions for doubtful accounts
|
|
|
65,280
|
|
|
182,000
|
|
Accreted interest
|
|
|
24,394
|
|
|
33,459
|
|
Impairment of assets
|
|
|
163,039
|
|
|
|
|
(Increase) decrease in assets
|
|
|
|
|
|
|
|
Inventories
|
|
|
(3,148,200
|
)
|
|
(1,800,648
|
)
|
Accounts receivable
|
|
|
2,177,840
|
|
|
(3,004,610
|
)
|
Income taxes receivable
|
|
|
3,639,613
|
|
|
(16,846
|
)
|
Other current assets
|
|
|
298,073
|
|
|
264,041
|
|
Increase (decrease) in liabilities
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(4,771,486
|
)
|
|
(1,414,650
|
)
|
Other accrued liabilities
|
|
|
1,446,394
|
|
|
438,340
|
|
Marketing fees payable
|
|
|
(1,419,760
|
)
|
|
|
|
Income taxes payable
|
|
|
|
|
|
(103,744
|
)
|
Net cash provided (used) by operating activities
|
|
|
5,029,211
|
|
|
(13,124,460
|
)
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
Purchase of property, plant, and equipment
|
|
|
(99,667
|
)
|
|
(2,301,359
|
)
|
Net cash used by investing activities
|
|
|
(99,667
|
)
|
|
(2,301,359
|
)
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
Repayments of long-term debt and notes payable
|
|
|
(2,529,308
|
)
|
|
(373,987
|
)
|
Proceeds from the exercise of stock options
|
|
|
71,616
|
|
|
19,000
|
|
Payment of dividends on Series I and II
Class B Convertible Preferred Stock
|
|
|
(876,566
|
)
|
|
|
|
Net cash used by financing activities
|
|
|
(3,334,258
|
)
|
|
(354,987
|
)
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
1,595,286
|
|
|
(15,780,806
|
)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at:
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
18,126,084
|
|
|
33,283,740
|
|
End of period
|
|
$
|
19,721,370
|
|
$
|
17,502,934
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
250,861
|
|
$
|
117,451
|
|
Income taxes paid
|
|
$
|
15,960
|
|
$
|
15,883
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and
financing activities:
|
|
|
|
|
|
|
|
Forgiveness of royalties by a shareholder
|
|
$
|
|
|
$
|
682,335
|
|
Debt assumed to construct warehouse
|
|
$
|
|
|
$
|
1,362,602
|
|
See accompanying notes to condensed financial statements
3
RETRACTABLE TECHNOLOGIES, INC.
NOTES TO
CONDENSED FINANCIAL STATEMENTS
(unaudited)
1.
BUSINESS OF
THE COMPANY AND BASIS OF PRESENTATION
Business of the Company
Retractable Technologies, Inc. (the Company)
was incorporated in Texas on May 9, 1994, and designs, develops,
manufactures, and markets safety syringes and other safety medical products for
the healthcare profession. The Company
began to develop its manufacturing operations in 1995. The Companys manufacturing and
administrative facilities are located in Little Elm, Texas. The Companys primary products with Notice of
Substantial Equivalence to the FDA are the VanishPoint
®
0.5mL insulin syringe; 1mL tuberculin,
insulin, and allergy antigen syringes; 3mL, 5mL, and 10mL syringes; the small
diameter tube adapter; the blood collection tube holder; the allergy tray; the
IV safety catheter; and the Patient Safe
®
syringe.
Basis of presentation
The accompanying condensed financial statements are
unaudited and, in the opinion of Management, reflect all adjustments that are
necessary for a fair presentation of the financial position and results of
operations for the periods presented.
All such adjustments are of a normal and recurring nature. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
entire year. The condensed financial
statements should be read in conjunction with the financial statement
disclosures contained in the Companys audited financial statements
incorporated into its Form 10-K filed on March 31, 2010 for the year
ended December 31, 2009 and Form 10-K/A filed on April 7, 2010
for the same period. Certain prior year
amounts have been reclassified to conform with the current periods
presentation.
2.
SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Accounting estimates
The preparation of financial statements in
conformity with U.S. generally accepted accounting principles (GAAP) requires
Management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period.
Actual results could differ significantly from those estimates.
Cash and cash equivalents
For purposes of reporting cash flows, cash and cash
equivalents include unrestricted cash, money market accounts, and investments
with original maturities of three months or less.
Accounts receivable
The Company records trade receivables when revenue
is recognized. No product has been
consigned to customers. The Companys
allowance for doubtful accounts is primarily determined by review of specific
trade receivables. Those accounts that
are doubtful of collection are included in the allowance. An additional allowance has been established
based on a percentage of receivables outstanding. These provisions are reviewed to determine
the adequacy of the allowance for doubtful accounts. Trade receivables are charged off when there
is certainty as to their being uncollectible.
Trade receivables are considered delinquent when payment has not been
made within contract terms.
4
Inventories
Inventories are valued at the lower of cost or
market, with cost being determined using actual average cost. The Company compares the average cost to the
market price and records the lower value.
Management considers such factors as the amount of inventory on hand and
in the distribution channel, estimated time to sell such inventory, the shelf
life of inventory, and current market conditions when determining excess or
obsolete inventories. A reserve is
established for any excess or obsolete inventories or they may be written off.
Property, plant, and equipment
Property, plant, and equipment are stated at
cost. Expenditures for maintenance and
repairs are charged to operations as incurred.
Cost includes major expenditures for improvements and replacements which
extend useful lives or increase capacity and interest cost associated with
significant capital additions. Gains or
losses from property disposals are included in income.
Depreciation and amortization are calculated using
the straight-line method over the following useful lives:
Production equipment
|
|
3 to 13 years
|
Office furniture and equipment
|
|
3 to 10 years
|
Buildings
|
|
39 years
|
Building improvements
|
|
15 years
|
Automobiles
|
|
7 years
|
Long-lived assets
The Company assesses the recoverability of
long-lived assets using an assessment of the estimated undiscounted future cash
flows related to such assets. In the
event that assets are found to be carried at amounts which are in excess of
estimated gross future cash flows, the assets will be adjusted for impairment
to a level commensurate with a discounted cash flow analysis of the underlying
assets.
During the first quarter of 2010, the Company
recognized an impairment charge of $163,039 on equipment designed in connection
with research and development activities.
The Company will outsource the majority of this production through
overseas manufacturers. Minimal cash flows, if any, are expected to be
generated by this equipment.
Accordingly, the Company has reduced the carrying value of this equipment
to an estimated fair value of zero. The
Companys management estimated the fair value of the equipment based on
guidance established by the
Fair Value Measurements
and Disclosures
Topic of the Financial Accounting Standards Board (FASB)
Accounting Standards Codification. In
this instance, the Companys management determined the impairment charge by
utilizing observable market data, a Level 2 input under the FASB Accounting
Standards Codification. A Level 1 input
would require quoted prices, which were not available in this matter.
The Companys remaining property, plant, and
equipment primarily consists of buildings, land, assembly equipment for
syringes, molding machines, molds, office equipment, furniture, and
fixtures. There has been no impairment
charge against the assembly equipment since the Company continues to
manufacture a significant portion of 1cc and 3cc syringes at the Companys
Little Elm facility which results in sufficient future cash flows to recoup the
net book value of all property, plant, and equipment.
Intangible assets
Intangible assets are stated at cost and consist
primarily of patents, a license agreement granting exclusive rights to use
patented technology, and trademarks which are amortized using the straight-line
method over 17 years.
5
Financial instruments
The Company estimates the fair market value of
financial instruments through the use of public market prices, quotes from
financial institutions, and other available information. Judgment is required in interpreting data to
develop estimates of market value and, accordingly, amounts are not necessarily
indicative of the amounts that could be realized in a current market
exchange. Short-term financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and
other liabilities, consist primarily of instruments without extended
maturities, the fair value of which, based on Managements estimates, equals
their recorded values.
Concentration risks
The Companys financial instruments exposed to
concentrations of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. Cash balances, some
of which exceed federally insured limits, are maintained in financial
institutions; however, Management believes the institutions are of high credit
quality. The majority of accounts
receivable are due from companies which are well-established entities. As a consequence, Management considers any
exposure from concentrations of credit risks to be limited. The Company had a high concentration of sales
with three significant customers accounting for approximately $11.5 million, or
40.8% of net sales in the nine months ended September 30, 2010.
The Company manufactures syringes in Little Elm,
Texas as well as utilizing manufacturers in China. The Company purchases most of its product
components from single suppliers, including needle adhesives and packaging
materials. There are multiple sources of
these materials. The Company obtained
roughly 64.9% of its finished products in the first nine months of 2010 from
Double Dove, a Chinese manufacturer. In
the event that the Company becomes unable to purchase such product from Double
Dove, the Company would need to find an alternate supplier for its 0.5mL
insulin syringe, its 5mL and 10mL syringes and its autodisable syringe and
increase domestic production for 1mL and 3mL syringes to avoid a disruption in
supply.
Revenue recognition
Revenue is recognized for sales when title and risk
of ownership passes to the customer, generally upon shipment. Under certain contracts, revenue is recorded
on the basis of sales price to distributors, less contractual pricing
allowances. Contractual pricing
allowances consist of: (i) rebates granted to distributors who provide
tracking reports which show, among other things, the facility that purchased
the products, and (ii) a provision for estimated contractual pricing
allowances for products that the Company has not received tracking reports. Rebates are recorded when issued and are
applied against the customers receivable balance. The provision for contractual pricing
allowances is reviewed at the end of each quarter and adjusted for changes in
levels of products for which there is no tracking report. Additionally, if it becomes clear that
tracking reports will not be provided by individual distributors, the provision
is further adjusted. The estimated contractual
allowance is netted against individual distributors accounts receivable
balances for financial reporting purposes.
The resulting net balance is reflected in accounts receivable or
accounts payable, as appropriate. The
terms and conditions of contractual pricing allowances are governed by
contracts between the Company and its distributors. Revenue for shipments directly to end-users
is recognized when title and risk of ownership pass from the Company. Any product shipped or distributed for evaluation
purposes is expensed.
Certain distributors have taken rebates to which
they are not entitled, such as utilizing a rebate for products not purchased
directly from the Company. The Company
has established a reserve for the collectibility of these amounts. The expense for the reserve is recorded in Operating
expense, General and administrative. The
reserve for such non-contractual deductions is a reduction of accounts
receivable.
The Companys domestic return policy is set forth in
its standard Distribution Agreement.
This policy provides that a customer may return incorrect shipments
within 10 days following arrival at the distributors facility. In all such cases the distributor must obtain
an authorization code from the Company and affix the code to the returned
product. The Company will not accept
returned goods without a returned goods authorization number. The Company may refund the customers money
or replace the product.
6
The Companys return policy also provides that a
customer may return product that is overstocked. Overstocking returns are limited to two times
in each 12-month period up to 1% of distributors total purchase of products
for the prior 12-month period. All
product overstocks and returns are subject to inspection and acceptance by the
Company.
The Companys international distribution agreements
do not provide for any returns.
The Company requires certain distributors to make a
prepayment prior to beginning production or shipment of their order. Distributors may apply such prepayments to
their outstanding invoices or pay the invoice and continue to carryforward the deposit
for future orders. Such amounts are
included in Other accrued liabilities on the Condensed Balance Sheets and are
shown in Note 5, Other Accrued Liabilities.
The Company records an allowance for estimated
returns as a reduction to Accounts receivable and Gross sales. Historically, returns have been less than
0.5% of net sales.
Litigation settlements
Proceeds from litigation settlements are recognized
when realizable. Generally, realization
is not reasonably assured and expected until proceeds are collected. Pursuant to a settlement agreement among the
Company, Abbott Laboratories (Abbott), and Hospira, Inc. (Hospira),
Hospira delivered $6 million to the Company in the third quarter of 2010. The
Company reduced its Litigation settlements by $144,000 attributable to an
unpaid Abbott invoice. Abbott also
waived its rights to any Series IV Class B preferred stock dividends.
Marketing fees
In prior periods, Marketing fees payable to Abbott
were included in current liabilities in the Condensed Balance Sheets. In connection with the settlement discussed
above, Marketing fees payable recorded in previous periods will not have to be
paid. The reversal of this accrual is
included in Litigation settlements, net on the Condensed Statements of
Operations.
Income taxes
The Company evaluates tax positions taken or
expected to be taken in a tax return for recognition in the financial
statements based on whether it is more-likely-than-not that a tax position
will be sustained based upon the technical merits of the position. Measurement of the tax position is based upon
the largest amount of benefit that is greater than 50% likely of being realized
upon ultimate settlement.
The Company provides for deferred income taxes
through utilizing an asset and liability approach for financial accounting and
reporting based on the tax effects of differences between the financial
statement and tax bases of assets and liabilities, based on enacted rates
expected to be in effect when such differences reverse in future periods. Deferred tax assets are periodically reviewed
for realizability. Under recent tax law
changes, companies are allowed to carryback taxable losses from either 2008 or
2009. The Company filed for a tax refund
utilizing its 2009 taxable losses which resulted in a $4.0 million refund
received in the quarter ending September 30, 2010. The Company has established a valuation
allowance for its net deferred tax asset as future taxable income cannot be
reasonably assured. Penalties and
interest on uncertain tax positions are classified as income taxes in the
Condensed Statements of Operations.
Earnings per share
The Company computes basic earnings per share by
dividing net earnings for the period (adjusted for any cumulative dividends for
the period) by the weighted average number of common shares outstanding during
the period. Diluted earnings per share (EPS)
includes the determinants of basic EPS and, in addition, reflects the dilutive
effect, if any, of the common stock deliverable pursuant to stock options or
common stock
7
issuable upon the conversion of convertible
preferred stock and convertible debt.
The potential dilution, if any, is shown on the following schedule.
|
|
Three Months
Ended
September 30, 2010
|
|
|
Three Months
Ended
September 30, 2009
|
|
|
Nine Months
Ended
September 30, 2010
|
|
|
Nine Months
Ended
September 30, 2009
|
|
Net income (loss)
|
$
|
8,231,005
|
|
$
|
(3,434,317
|
)
|
$
|
3,194,431
|
|
$
|
(10,111,322
|
)
|
Preferred dividend requirements
|
|
(342,717
|
)
|
|
(342,717
|
)
|
|
(1,028,151
|
)
|
|
(1,028,151
|
)
|
Earnings (loss) available to common shareholders
|
|
7,888,288
|
|
|
(3,777,034
|
)
|
|
2,166,280
|
|
|
(11,139,473
|
)
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock
|
|
342,717
|
|
|
|
|
|
|
|
|
|
|
Convertible debt interest and loan fees
|
|
(18,887
|
)
|
|
|
|
|
(843
|
)
|
|
|
|
Earnings (loss) available to common shareholders
after assumed conversions
|
$
|
8,212,118
|
|
$
|
(3,777,034
|
)
|
$
|
2,165,437
|
|
$
|
(11,139,473
|
)
|
Average common shares outstanding
|
|
23,887,028
|
|
|
23,803,397
|
|
|
23,845,775
|
|
|
23,801,175
|
|
Dilutive stock equivalents from stock options
|
|
2,342,119
|
|
|
|
|
|
2,361,349
|
|
|
|
|
Shares issuable upon conversion of preferred stock
|
|
2,285,266
|
|
|
|
|
|
|
|
|
|
|
Shares issuable upon conversion of convertible
debt
|
|
212,279
|
|
|
|
|
|
212,279
|
|
|
|
|
Average common and common equivalent shares
outstanding - assuming dilution
|
|
28,726,692
|
|
|
23,803,397
|
|
|
26,419,403
|
|
|
23,801,175
|
|
Basic earnings per share
|
$
|
0.33
|
|
$
|
(0.16
|
)
|
$
|
0.09
|
|
$
|
(0.47
|
)
|
Diluted earnings per share
|
$
|
0.29
|
|
$
|
(0.16
|
)
|
$
|
0.08
|
|
$
|
(0.47
|
)
|
Shipping and handling costs
The Company classifies shipping and handling costs
as part of Cost of sales in the Condensed Statements of Operations.
Research and development costs
Research and development costs are expensed as
incurred.
Share-based compensation
The Companys share-based payments are accounted for
using the fair value method. The Company
records share-based compensation expense on a straight-line basis over the
requisite service period. The Company
incurred the following share-based compensation costs:
8
|
|
Three Months
Ended
September 30, 2010
|
|
Three Months
Ended
September 30, 2009
|
|
Nine Months
Ended
September 30, 2010
|
|
Nine Months
Ended
September 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
$
|
|
$
|
123,030
|
$
|
182,891
|
$
|
201,501
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
|
74,414
|
|
78,343
|
|
171,192
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
|
16,903
|
|
28,259
|
|
29,537
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
|
768,884
|
|
1,050,807
|
|
927,336
|
|
|
$
|
|
$
|
983,231
|
$
|
1,340,300
|
$
|
1,329,566
|
|
All stock options were fully vested at June 30, 2010;
therefore, all stock option expense was fully recognized at June 30, 2010.
3.
INVENTORIES
Inventories consist of the following:
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Raw
materials
|
$
|
1,938,260
|
|
$
|
2,424,818
|
|
Finished
goods
|
|
8,322,909
|
|
|
4,688,151
|
|
|
|
10,261,169
|
|
|
7,112,969
|
|
Inventory
reserve
|
|
(205,600
|
)
|
|
(205,600
|
)
|
|
$
|
10,055,569
|
|
$
|
6,907,369
|
|
4.
INCOME
TAXES
The Companys effective tax rate on the net income
(loss) before income taxes was 11.7% (benefit) and 2.0% (benefit) for the nine
months ended September 30, 2010 and September 30, 2009,
respectively. This benefit is due to a
carryback of net operating loss for 2009 pursuant to a revision in the tax law.
5.
OTHER
ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
|
|
September 30, 2010
|
|
|
December 31, 2009
|
|
Prepayments
from customers
|
$
|
1,694,951
|
|
$
|
499,777
|
|
Accrued
property taxes
|
|
330,828
|
|
|
|
|
Accrued
professional fees
|
|
114,880
|
|
|
191,416
|
|
Other
accrued expenses
|
|
64,708
|
|
|
54,267
|
|
|
$
|
2,205,367
|
|
$
|
745,460
|
|
Prepayments from customers increased due to larger
international orders that require prepayments.
6.
COMMITMENTS
AND CONTINGENCIES
In June 2010, Becton Dickinson and Company (BD)
filed an appeal in the U.S. Court of Appeals for the Federal Circuit appealing
a final judgment entered on May 19, 2010 for the Company and against BDs
counterclaims in patent litigation. Such
final judgment ordered that the Company recover $5,000,000 plus prejudgment
interest, and ordered a permanent injunction for BDs 1mL and 3mL Integra
syringes until the expiration of certain patents. The permanent injunction was stayed for the
longer of the exhaustion of the appeal of the district courts case or twelve
months from May 19, 2010. Briefing
for the appeal will be completed in November 2010 with oral argument
likely to take place in 2011. At this
time, a final decision by the appellate court is anticipated to occur in 2011.
9
In May 2010, the Company and an officers suit
against BD in the U.S. District Court for the Eastern District of Texas,
Marshall Division alleging violations of antitrust acts, false advertising,
product disparagement, tortious interference, and unfair competition was
reopened. The Company and an officer
filed a Second Amended Complaint on July 23, 2010 setting forth additional
detail regarding the allegations of BDs illegal conduct. BD filed a motion to dismiss and briefing is
in progress. A scheduling conference has
been set for December 8, 2010 and it is possible that a trial date will be
set at that time.
In September 2007, BD and MDC Investment
Holdings, Inc. (MDC) sued the Company in the United States District
Court for the Eastern District of Texas, Texarkana Division, initially alleging
that the Company is infringing two U.S. patents of MDC (6,179,812 and
7,090,656) that are licensed to BD. BD and MDC seek injunctive relief and
unspecified damages. The Company
counterclaimed for declarations of non-infringement, invalidity, and
unenforceability of the asserted patents.
The plaintiffs subsequently dropped allegations with regard to patent
no. 7,090,656 and the Company subsequently dropped its counterclaims for
unenforceability of the asserted patents.
The Court conducted a claims construction hearing on September 25,
2008 and issued its claims construction order on November 14, 2008. No trial date has been set.
Item 2.
Managements
Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENT WARNING
Certain statements included by reference in this
filing containing the words could, may, believes, anticipates, intends,
expects, and similar such words constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act. Any forward-looking statements involve known
and unknown risks, uncertainties, and other factors that may cause our actual
results, performance, or achievements to be materially different from any
future results, performance, or achievements expressed or implied by such
forward-looking statements. Such factors
include, among others, our ability to maintain liquidity, our maintenance of
patent protection, the impact of current litigation, our ability to maintain
favorable supplier arrangements and relationships, our ability to quickly
increase capacity in response to an increase in demand, our ability to access
the market, our ability to maintain or lower costs, our ability to continue to
finance research and development as well as operations and expansion of
production, the increased interest of larger market players, specifically
Becton Dickinson and Company (BD), in providing devices to the safety market,
and other factors referenced in Item
1A. Risk Factors in Part II.
Given these uncertainties, undue reliance should not be placed on
forward-looking statements.
MATERIAL CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We have been manufacturing and marketing our
products into the marketplace since 1997.
Safety syringes comprised 98.5% of our sales in the first nine months of
2010. We currently provide other safety
medical products in addition to safety syringe products. One such product is the Patient Safe
®
syringe, which is uniquely designed to reduce
the risk of bloodstream infections resulting from catheter hub
contamination. Patient Safe
®
s unique luer guard reduces
the risk of luer tip contact contamination and the risk of contamination of
intravenous fluid. We also manufacture
and market safety IV catheters and safety blood collection tube holders. Both products have a retractable needle.
Historically, unit sales
have increased in the latter part of the year due, in part, to the demand for
syringes during the flu season.
Our products have been and continue to be
distributed nationally and internationally through numerous distributors. Although we have made limited progress in
some areas, such as the alternate care market, our volumes are not as high as
they should be given the nature and quality of our products and the federal and
state legislation requiring the use of safe needle devices. The alternate care market is composed of
alternate care facilities that provide long-term nursing care out-patient
surgery, emergency care, and physician services. The fact that our progress is limited is
principally due to exclusive marketing practices engaged in by BD, the dominant
maker and seller of disposable syringes and other needle products, which practices
have blocked us from access to the market.
We believe that BDs
10
monopolistic
business practices continue despite a prior settlement in 2004 for
anticompetitive practices and a patent infringement verdict in 2010. A suit against BD is currently pending
alleging violations of state and federal antitrust acts and false advertising.
We continue to pursue various strategies to have
better access to the hospital market, as well as other markets, including
attempting to gain access to the market through our sales efforts, our
innovative technology, introduction of new products, and, when necessary,
litigation.
We sued Occupational and Medical Innovations Limited
(OMI) in April 2008 and separately sued BD in June 2007 for claims
of patent infringement (see Item 3. Legal Proceedings of the Form 10-K),
and in March 2010 and May 2010, respectively, the products of such
companies were found to infringe our patents.
These judgments may have increased the demand for our product. OMI was immediately enjoined from further
sales of its products, but in the case of BD syringes, the Courts injunction
was stayed pending appeal, so that product remains in the market at this time.
However, BD
voluntarily removed its 1cc syringes from the market, which may have positively
affected our sales.
In the event we continue to have only limited market
access, and the cash provided by the litigation settlements and generated from
operations becomes insufficient, we would take additional cost cutting measures
to reduce cash requirements. Such
measures could result in the reduction of units being produced, the reduction
of workforce, the reduction of salaries of officers and other nonhourly
employees, and the deferral of royalty payments. We took such actions at the end of the second
quarter of 2009.
At the end of the second quarter of 2009, we
announced that in the interest of the long-term survival of the Company we
would reorganize some of the Companys functions and implement staff
reductions, all in order to minimize our cash expenditures and conserve our
resources. Although certain salary
reductions remain in place, we granted one-time payments to our employees to
offset such salary reductions in the third quarter of 2010. We also granted one-time payments to our
independent Directors in the third quarter of 2010. Our workforce was reduced by 16% on July 1,
2009. However, due to the increase in
production from sales to the Department of Health and Human Services, we
increased the workforce at the Little Elm facility beginning in the latter part
of the third quarter of 2009. The effect
of Mr. Shaws waiver of $1,000,000 in royalties was fully realized in
2009. Salaries for all personnel above a
certain salary level were cut by 10% in 2009 (subject to contract rights). As a result of the cost cutting measures,
compensation costs for the nine months ended September 30, 2010 included
in Operating expenses were reduced by $930,000 and 401
(k) matching expense
declined $77,000. Other costs related to
steps taken last year to reduce costs include reductions of $126,000 for
consulting, $193,000 for travel and entertainment, and $71,000 for marketing
expense for the nine months ended September 30, 2010.
We are bringing additional molding operations to
Little Elm as a cost saving measure. We
continue to focus on methods of upgrading our manufacturing capability and
efficiency in order to reduce costs.
Pursuant to a settlement agreement among us, Abbott
Laboratories (Abbott), and Hospira, Inc. (Hospira) effective July 12,
2010 (the Effective Date), Hospira delivered $6 million to us in the third
quarter of 2010. Also pursuant to this
settlement agreement, Abbott waived its rights to any Series IV Class B
preferred stock dividends. The marketing
fee of $1,419,760 and payment of an Abbott invoice of $144,000 due to the
Company were also waived. Additionally,
Hospira was granted an exclusive one-year option to negotiate a licensing
agreement for certain uses of our Patient Safe
®
syringe. In
exchange for the option, Hospira shall pay us $2 million per quarter for four
quarters, beginning three months from the Effective Date and every three months
thereafter, for a total of $8 million.
In the event a licensing agreement is entered into, any remaining
portion of the option fee shall, when paid, be credited against royalties
payable by Hospira to us. In the third
quarter of 2010, we granted bonuses to certain officers and employees in
recognition of work leading to the Abbott settlement.
In the second quarter of 2010, we reached an
agreement with our counsel, Locke Lord Bissell & Liddell, regarding
future litigation expenditures that caps certain of our litigation costs in
exchange for a contingent fee interest.
We believe this agreement serves both the short-term and long-term
interests of the Company and will reduce the legal fee component of our General
and administrative costs and will impact our cash flow in a positive manner.
11
Product purchases from Double Dove, a Chinese
manufacturer, have enabled us to increase manufacturing capacity with little
capital outlay and have provided a competitive manufacturing cost. In the nine months ended September 30,
2010, Double Dove manufactured approximately 64.9% of the units we
produced. We believe we could make up
any long-term disruption in these purchases by utilizing more of the capacity
at the Little Elm facility, except for the 0.5mL insulin syringe, the 5mL and
10mL syringes, and the autodisable syringe which altogether comprised about
7.0% of our revenues for the nine months ended September 30, 2010.
With increased volumes, our manufacturing unit costs
have generally tended to decline. Factors
that could affect our unit costs include increases in costs by third party
manufacturers, changing production volumes, costs of petroleum products, and
transportation costs. Increases in such
costs may not be recoverable through price increases of our products.
The following discussion may contain trend
information and other forward-looking statements that involve a number of risks
and uncertainties. Our actual future
results could differ materially from our historical results of operations and
those discussed in any forward-looking statements. Variances have been rounded for ease of
reading. All period references are to
the periods ended September 30, 2010 or 2009.
Comparison of Three Months Ended September 30,
2010 and September 30, 2009
Domestic sales accounted for 80.1% and 84.8% of the
net sales for the three months ended September 30, 2010 and 2009,
respectively. International sales
accounted for the remaining revenues.
Domestic revenues increased 7.5% principally due to higher average sales
prices. International revenues increased
48.8% due primarily to higher volumes.
Overall, unit sales increased 2.7%.
Domestic unit sales decreased 8.9%, which may be attributable to a
reduction in flu vaccine being administered.
International unit sales increased 38.4%, which may be due to the lower
international sales last year due to increased domestic demand by the
Department of Health and Human Services during the same period. Domestic unit sales were 67.0% of total unit
sales for the three months ended September 30, 2010.
Gross profit increased primarily due to higher
revenues and lower unit manufacturing costs.
The average cost of manufactured product sold per unit decreased by
15.8% due to lower piece part prices due to increasing our molding operations
at the Little Elm facility and a significant increase in the number of units
produced, thereby reducing the unit costs attributable to fixed costs. Profit margins can fluctuate depending upon,
among other things, the Cost of manufactured product and the capitalized cost
of product recorded in inventory, as well as product sales mix. Royalty expense increased 21.9% due to higher
gross revenue.
Operating expenses decreased 35.5%. The decrease was due to lower litigation
costs and lower stock option expense, mitigated by amounts paid to employees who
had a salary reduction last year. The
lower litigation costs are the result of an agreement between us and our
counsel to cap certain litigation fees.
This is the first quarter that the full effect of the agreement is being
realized.
Operating income was $1.0 million compared to an
operating loss for the same period last year of $3.5 million.
Interest expense increased due to no interest being
capitalized for the current period.
Litigation settlements, net reflect certain
provisions of our settlement with Abbott and Hospira pursuant to which we
received a payment of $6.0 million. In
addition, Abbott waived a $1.4 million marketing fee and an invoice due from
Abbott to the Company was waived.
The Companys effective tax rate on the net income
(loss) before income taxes was zero percent and 2.8% (benefit) for the three
months ended September 30, 2010 and September 30, 2009, respectively. The benefit in 2009 is due to a carryback of
our net operating loss for 2009 pursuant to a revision in the tax law.
12
Comparison of Nine Months Ended September 30, 2010 and September 30,
2009
Domestic sales accounted for 87.0% and 83.6% of the
net sales for the nine months ended September 30, 2010 and 2009,
respectively. International sales
accounted for the remaining revenues.
Domestic revenues increased 34.7% principally due to higher average sales
prices. International revenues increased
2.2% due primarily to higher average prices.
Overall, unit sales increased 14.2%.
Domestic unit sales increased 21.7%, which may be attributable to flu
season purchases earlier in the year.
International unit sales decreased 6.2%.
Domestic unit sales were 77.9% of total unit sales for the nine months
ended September 30, 2010.
Gross profit increased primarily due to higher
revenues and lower unit manufacturing costs.
The average cost of manufactured product sold per unit decreased by 6.3%
due to lower piece part prices due to increasing our molding operations at the
Little Elm facility and a significant increase in the number of units produced,
thereby reducing the unit costs attributable to fixed costs. Profit margins can fluctuate depending upon,
among other things, the Cost of manufactured product and the capitalized cost
of product recorded in inventory, as well as product sales mix. Royalty expense increased 28.1% due to higher
gross revenue.
Operating expenses decreased 7.1%. The decrease was due to lower litigation
costs and lower salary levels, along with reduced travel and entertainment,
consulting, and marketing expense. These
reductions were mitigated by amounts paid to those employees who had a salary
reduction last year. The lower
litigation costs are the result of an agreement between us and our counsel to
cap certain litigation fees.
Loss from operations decreased 59.5% due principally
to increased gross profit and reduced expenses.
Interest expense increased due to no interest being
capitalized for the current period.
Litigation settlements, net reflect certain
provisions of our settlement with Abbott and Hospira pursuant to which we
received a payment of $6.0 million. In
addition, Abbott waived a $1.4 million marketing fee and an invoice due from
Abbott to the Company was waived.
The Companys effective tax rate on the net income
(loss) before income taxes was 11.7% (benefit) and 2.0% (benefit) for the nine
months ended September 30, 2010 and September 30, 2009,
respectively. This benefit is due to a
carryback of our net operating loss for 2009 pursuant to a revision in the tax
law.
Discussion of Balance Sheet and Statement of Cash Flow Items
Our balance sheet remains strong with cash making up
39.1% of total assets. Working capital
was $30.6 million at September 30, 2010, an increase of $4.6 million from December 31,
2009.
We expect to continue moving the manufacturing of
piece parts to Little Elm as a cost saving measure. Finished goods inventory increased 77.5%
since December 31, 2009 because of our preparation for flu season.
Approximately $5.0 million in cash flow in the first
nine months of 2010 was provided by operating activities. Provisions of cash, in addition to net
income, were accounts receivable and the payment to us of a $4.0 million
federal tax refund. Uses of cash for
operating activities were primarily for inventories and accounts payable. Prepayments from customers increased due to
larger international orders that require prepayments.
LIQUIDITY
Historical Sources of Liquidity
We have historically funded operations primarily
from the proceeds from revenues, private placements, loans, and litigation
settlements.
13
Internal Sources of Liquidity
Margins and Market Access
To achieve break-even quarters consistently, we need
minimal access to hospital markets which has been difficult to obtain due to
the monopolistic marketplace which was the subject of our initial lawsuit and
now also included in our second antitrust lawsuit against BD.
We
will continue to attempt to gain access to the market through our sales
efforts, innovative technology, the introduction of new products, and, when necessary,
litigation.
We continue to focus on methods of upgrading our
manufacturing capability and efficiency in order to reduce costs.
Fluctuations in the cost and availability of raw
materials and inventory and our ability to maintain favorable supplier
arrangements and relationships could result in the need to manufacture all (as
opposed to 33.4%) of our products in the U.S.
This could temporarily increase unit costs as we ramp up domestic
production.
The mix of domestic and international sales affects
the average sales price of our products.
Generally, the higher the ratio of domestic sales to international
sales, the higher the average sales price will be. Typically international sales are shipped
directly from China to the customer.
Purchases of product manufactured in China, if available, usually
decrease the average cost of manufacture for all units. Domestic costs, such as indirect labor and
overhead, remain relatively constant.
The number of units produced by the Company versus manufactured in China
can have a significant effect on the carrying costs of inventory as well as
Cost of sales. We will continue to
evaluate the appropriate mix of products manufactured domestically and those
manufactured in China to achieve economic benefits as well as to maintain our
domestic manufacturing capability.
Fluctuations in the cost of oil (since our products
are petroleum based), transportation, and the volume of units purchased from
Double Dove may have an impact on the unit costs of our product. Increases in such costs may not be
recoverable through price increases of our products. Reductions in oil prices may not quickly
affect petroleum product prices.
Seasonality
Historically, unit sales have increased in the
latter part of the year due, in part, to the demand for syringes during the flu
season.
Licensing Agreements
Pursuant to a settlement agreement among us, Abbott,
and Hospira effective July 12, 2010 (the Effective Date), Hospira was
granted an exclusive one-year option to negotiate a licensing agreement to
produce and market our Patient Safe
®
syringe for
certain uses. In exchange for the
option, Hospira shall pay us $2 million per quarter for four quarters,
beginning three months from the Effective Date and every three months
thereafter, for a total of $8 million.
In the event a licensing agreement is entered into, any remaining
portion of the option fee shall, when paid, be credited against royalties
payable by Hospira to the Company.
We are working with BTMD to renew its license agreement.
Cash Requirements
Due to funds received from prior litigation
settlements and income, we have sufficient cash reserves and intend to rely on
operations, cash reserves, and debt financing as the primary ongoing sources of
cash. In the event we continue to have
only limited market access and cash generated from operations becomes
insufficient to support operations, we would take additional cost cutting
measures to reduce cash requirements.
Such measures could result in the reduction of units being produced, the
reduction of workforce, the reduction of salaries of officers and other
nonhourly employees, and the deferral of royalty payments.
14
External Sources of Liquidity
We have obtained several loans from our inception,
which have, together with the proceeds from the sales of equities and
litigation efforts, enabled us to pursue development and production of our
products. Given the current economic
conditions, our ability to obtain additional funds through loans is
uncertain. Furthermore, the shareholders
previously authorized an additional 5,000,000 shares of a Class C
Preferred Stock that could, if necessary, be designated and used to raise funds
through the sale of equity. Due to the
current market price of our Common Stock, it is unlikely we would choose to
raise funds by the sale of equity.
We obtained a loan from 1st International, for
$2,500,000, secured by the land and existing buildings, which provided funding
for the construction of the 47,250 square foot warehouse placed in service in
2005. This loan matured in late March 2010
and we paid $2,122,445 to pay off the loan on April 23, 2010.
On August 29, 2008, we obtained a $4,210,000
interim construction loan from 1
st
International.
The purpose of the loan was to expand the warehouse, including
additional office space, and construct a new Controlled Environment. The construction project was completed and the loan was renewed on December 10,
2009 with a 20 year amortization and 10 year maturity. The interest rate is 5.968%.
Pursuant to a settlement agreement among us, Abbott,
and Hospira, Hospira delivered $6 million to us in the third quarter of
2010. Also pursuant to this settlement
agreement, Abbott waived its rights to any Series IV Class B
preferred stock dividends. The marketing
fee of $1,419,760 and payment of an Abbott invoice of $144,000 due to the
Company were also waived.
CAPITAL RESOURCES
Trends in Capital Resources
Interest expense will increase due to the reduction
of capitalized interest at the present time.
It may also be affected by additional loans or rising interest
rates. Interest income may continue to
be negatively affected by lower interest rates and our prior movement of cash
to U.S. Treasury bills and other U.S. government backed securities.
Although
we believe that we have granted credit to credit-worthy firms, current economic
conditions may affect the timing and/or collectability of some accounts.
CONTRACTUAL OBLIGATIONS
We obtained a loan from 1st International for
$2,500,000, secured by the land and existing buildings, which provided funding
for the construction of the 47,250 square foot warehouse placed in service in
2005. This loan matured in late March 2010
and we paid $2,122,445 to pay off the loan on April 23, 2010.
Item 3.
Quantitative
and Qualitative Disclosures About Market Risk.
No update.
Item 4.
Controls
and Procedures.
Disclosure Controls and Procedures
Pursuant to Rule 13a-15(b) of the
Securities Exchange Act of 1934, Management, with the participation of our
President, Chairman, and Chief Executive Officer, Thomas J. Shaw (the CEO),
and our Vice President and Chief Financial Officer, Douglas W. Cowan (the CFO),
acting in their capacities as our principal executive and principal financial
officers, evaluated the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934. The term disclosure controls and procedures
means controls and other
procedures that are designed to ensure that information required to be
disclosed by us in our periodic reports is: i) recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms; and ii) accumulated and communicated to our
Management, including our principal executive and principal financial officers,
as appropriate to allow timely decisions regarding required
15
disclosure.
Based upon this evaluation, the CEO and CFO concluded that, as of September 30,
2010, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There have been no changes during the third quarter
of 2010 or subsequent to September 30, 2010 in our internal control over
financial reporting that has materially affected or is reasonably likely to
materially affect our internal control over financial reporting.
PART IIOTHER INFORMATION
Item 1.
Legal
Proceedings.
Please refer to Note 6 to the financial statements
for a complete description of all legal proceedings.
Item 1A.
Risk
Factors.
There were no material changes in the Risk Factors
applicable to the Company as set forth in our Form 10-K annual report for
2009 which was filed on March 31, 2010, and which is available on EDGAR.
Item 2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
Working Capital Restrictions and Limitations on the Payment of
Dividends
The certificates of designation for each of the outstanding
series of Class B Convertible Preferred Stock each currently provide that,
if a dividend upon any shares of Preferred Stock is in arrears, no dividends
may be paid or declared upon any stock ranking junior to such stock and
generally no junior preferred stock may be redeemed. However, under certain conditions, and for
certain Series of Class B Convertible Preferred Stock, we may
purchase junior preferred stock even when dividends are in arrears.
Item 3.
Defaults
Upon Senior Securities.
Series I Class B Convertible Preferred Stock
As of the nine months ended September 30, 2010,
the amount of dividends in arrears was $18,000 and the total arrearage was
$18,000.
Series II Class B Convertible Preferred Stock
As of the nine months ended September 30, 2010,
the amount of dividends in arrears was $54,000 and the total arrearage was
$54,000.
Series III Class B Convertible Preferred Stock
As of the nine months ended September 30, 2010,
the amount of dividends in arrears was $98,000 and the total arrearage was
$3,343,000.
Series IV Class B Convertible Preferred Stock
As of the nine months ended September 30, 2010,
the amount of dividends in arrears was $414,000 and the total arrearage was
$5,844,000. The total dividend arrearage
has been reduced due to the Abbott settlement whereby Abbott has foregone its
rights to its dividends.
16
Series V Class B Convertible Preferred Stock
As of the nine months ended September 30, 2010,
the amount of dividends in arrears was $297,000 and the total arrearage was
$3,991,000.
Item 6.
Exhibits.
Exhibit No.
|
|
Description
of Document
|
|
|
|
3(i) and 4(v)
|
|
Restated Certificate of Formation with Certificates of Designation,
Preferences, Rights and Limitations of Class B Preferred Stock (all Series)
|
|
|
|
31.1
|
|
Certification of Principal
Executive Officer
|
|
|
|
31.2
|
|
Certification of Principal
Financial Officer
|
|
|
|
32
|
|
Certification Pursuant to 18 U.S.C. Section 1350
|
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
DATE: November 15,
2010
|
RETRACTABLE
TECHNOLOGIES, INC.
|
|
(Registrant)
|
|
|
|
|
|
|
|
BY:
|
/s/ Douglas W. Cowan
|
|
|
DOUGLAS W. COWAN
VICE
PRESIDENT, CHIEF FINANCIAL
OFFICER,
AND CHIEF ACCOUNTING
OFFICER
|
17
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